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Bootstrapping a Start-Up in Silicon Valley

By Adriana Gardella August 17, 2010 7:00 amAugust 17, 2010 7:00 am

Laura Pedrick for The New York TimesElizabeth Charnock

Burned by a previous experience running a venture-capital-backed technology start-up, Elizabeth Charnock vowed to do things differently the next time. Despite challenges, Ms. Charnock, 43, is now making good on her promise as chief executive and founder of Cataphora, a bootstrapped, 60-employee firm that makes software used to track and analyze computer users’ online activity and communications.

So far, the company, founded in 2002 and based in Redwood Shores, Calif., has focused on gathering evidence for lawsuits and internal corporate investigations — such as unearthing incriminating patterns in an employee’s e-mailed communications. Now, Cataphora is entering the consumer market with Digital Mirror, software that allows its users to manage and optimize their online identities. Ms. Charnock, author of “E-Habits: What You Must do to Optimize Your Professional Digital Presence,” recently explained that diversifying on a shoestring is just the latest test for her company. A condensed version of the conversation follows.

Q. Why were you determined to forego venture capital?

Ms. Charnock: I had a very bad experience as C.E.O. of Troba, a venture-backed company founded in 1999, during the tech bubble. After the bubble burst, the V.C. who sat on our board left the V.C. firm. Subsequently, the firm indicated that it would not put more money into Troba, scaring off other potential investors. We had to sell the company in a fire sale, taking it bankrupt while solvent. This time around, I wanted to gain real operating experience and be employee-owned. So I said, “Let’s see if we can bootstrap.”

Q. Can you?

Ms. Charnock: Yes, though there have been more challenges than I thought there would be. We’re financed solely with revenue, which is in the low eight-figure range, and sweat equity. For the first year and a half, none of our 13 employees received a paycheck — including my husband, who is chief technology officer. Some lived off their savings, some did other work on the side or lived with their parents. Even now, I — and most of the employees — continually work 80-hour weeks.

Q. What’s been the hardest thing about bootstrapping?

Ms. Charnock: Here in Silicon Valley, everyone assumes that larger start-ups are venture-backed and swimming in money — and all of their expectations are set accordingly. Many people expect inflated salaries and to get rich quick — often without their start-up having earned any appreciable amount of revenue. Even very smart, senior people have been known to ask me, “When do you run out of money?” I then have to explain that real businesses don’t run out of money. They go make more.

Q. What can you offer employees?

Ms. Charnock: At least two things: equity and a great learning opportunity. The employees own virtually 100 percent of the company (there are a few advisers who are also shareholders and I myself own only a fairly modest fraction of it). So, everyone is a shareholder — or at least an option holder. And while I couldn’t promise success, especially in the early days, I did promise that everyone who joined would learn far more, far faster here than they could elsewhere. Still, we do have a hard time finding experienced managers here in Silicon Valley. Most of our managers are homegrown, and we’ve had to teach them to be managers.

Q. How do you do that?

Ms. Charnock: Large amounts of personal mentoring. Arguably, a lot of my time that would have gone toward dealing with investors went instead toward mentoring. We also allow people to take on tasks they’re not quite ready for with the knowledge that mistakes will be made and that we can live with, or correct, them.

Q.Why would you be willing to work so hard and take so much risk for only a modest fraction of ownership? Isn’t preserving equity one of the main reasons people choose to bootstrap?

Ms. Charnock: I still have more equity than I’d have had I gone the venture route — and much more satisfaction. The equity that otherwise would have gone to investors went to employees. I also believed that this route was likelier to succeed, increasing the probability that the stock has value in the end. So I think it is more medium term sacrifice but less risk. And I have learned vastly more from it. Preserving equity is important to us collectively: we want to all get rich together.

Q. Has being in control lived up to your expectations?

Ms. Charnock: The employees and I control our destiny far, far more than would have been possible under the V.C. model. We have often made choices to build longer term value that would have been much harder to rationalize within the constraints of a model that is looking for a quicker, if lesser, return. I’ve often noticed that when venture-backed companies flounder or fail, no one feels responsible. The C.E.O. blames the investors; the investors blame the C.E.O. In our situation, we know that we need to make it work.

Q. Why have you decided to go into the consumer market?

Ms. Charnock: If you delight consumers, you can quickly grow your business. We have great government and corporate clients. But helping companies respond to subpoenas isn’t really a technology play. Our technology is broader than that. My V.C. friends ask why we’re still doing the legal stuff, and I have to explain that we need to pay the bills. We have to plan for the future while dealing with the world we’re in.

Q. What are your ultimate plans for Cataphora?

Ms. Charnock: Our long-term goal is to go public. So, if and when later stage capital is appropriate to the needs of the business, we would certainly take it.

Q. What do your V.C.-funded friends think of what you’re doing?

Ms. Charnock: They alternate between envy, awe, disbelief, and thinking that I am totally crazy.

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